Brief Event-Driven: Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait and more

In this briefing:

1. Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait
2. Linkbal (6046 JP) SmallCap Growth Stock: Offering This Morning, TOPIX Inclusion Late Summer 2019?
3. Ho Bee Ups Stake In Villa World After AVID Lobs An Offer
4. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit
5. Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?

1. Descente Tamed, Itochu Delicacy Required And Investors Can Probably Wait

I started writing this over the weekend after the results of the Itochu Corp (8001 JP) Tender Offer for 9.56% of Descente Ltd (8114 JP) were announced late Friday. 

Itochu planned on buying 7.21 million shares out of the 75.37mm shares which bear voting rights (as of the commencement of the Tender), and 15,115,148mm shares were tendered, which led to a pro-ration rate of 47.7% which was 0.3% below my the middle of my “wide range” expected pro-ration rate of 42-54% and 0.7% beyond the 44-47% tighter range discussed in Descente Descended and Itochu Angle Is More Hostile of 28 February.

Two more central ideas were discussed in that piece:

1. The hostility shown by Descente management during the Tender Offer had led Itochu to abandon discussions about post-tender management until after the Tender Offer was completed. Both sides indicated a willingness to pick up where things had left off – at Descente’s request – but Descente needed to stew a bit.
2. The revelation by ANTA Sports in an interview with the CEO in the Nikkei in late February that ANTA supported Itochu meant that the likelihood of Itochu NOT having enough votes to put through its own slate of directors was almost zero. At a combined 47.0% of post-Tender voting rights, if 94% or less of shares were to vote, it would mean Itochu could get the majority of over 50% and determine the entire slate of directors themselves. If there was another shareholder holding a couple of percent which supported Itochu, it would be a done deal even if everyone voted. And that 2-3% existed.

So… the threat that Itochu would hold an EGM to seat new directors to oblige a stronger course for management was a very strong probability. Management who was rabidly opposed to Itochu owning the stake could not very well bow down in front of Itochu post-tender just to save its own hide – not after the employee union and the OB group came out against. President Ishimoto had effectively put himself in an untenable position unless a miracle occurred because Itochu could not legally walk away from its offer, and Ishimoto-san was bad-mouthing Itochu even as they were negotiating during the Tender Offer Period. 

It was not, therefore, any surprise that President Ishimoto would step down. The surprise for me was that the news he would go came out as talks commenced over the weekend (but did not “bridge the gap” as the Nikkei reported), before we got to the first business day post-results. 

Talks apparently continue with no resolution, and the media reports offer no hint as to what the issues might be. 

2. Linkbal (6046 JP) SmallCap Growth Stock: Offering This Morning, TOPIX Inclusion Late Summer 2019?

On November 13th last year, Linkbal Inc (6046 JP) announced it was looking to move from MOTHERS to the TSE First Section. The stock rallied. At the same time the company said that it was preparing to file an application for the move. 

On March 5th, the company announced a forthcoming tachiaigai bunbai offering designed to increase the float. That tachiaigai bunbai offering (designed for retail investors only) takes place this morning after an announcement the company would oversee the offer of 970,000 shares (about 5% of the company but about 180% of the float currently held by public retail investors) at a price of ¥905/share (1,000 shares max per buyer), which is a 3% discount to yesterday’s close of ¥933 yen. 

This will get it most of the way towards meeting the requirements, but likely not all the way. An inclusion is still months off. And there would likely be another sale to increase shareholder count by 800-1000 before then, whether in the form of a Public Offering/Uridashi or in the form of another tachiaigai bunbai.

Given where we are on timing, as shown in Historical TOPIX Inclusions:  How Do They Do Around Inclusion Date? this would seem an interesting bet. Given the company’s prodigious growth in sales and profits, even though it is small, more people will look at it.

3. Ho Bee Ups Stake In Villa World After AVID Lobs An Offer

On the 14th March 2019, Australian property developer, Villa World Ltd (VLW AU) announced that it had received an unsolicited proposal, by way of a scheme, from AVID Property Group Australia at an offer price A$2.23, or a 12% premium to last close. 

The offer is conditional on due diligence, unanimous approval of VLW’s board of directors and the receipt of FIRB and other regulatory approvals.

AVID’s indicative offer translates to an LTM PER and P/B of 6.4x and 0.9x, with the P/B metric roughly in line peers.

During 2018, VLW’s share price declined by 36% to A$1.76 from A$2.77, with a large chunk of that downward move occurring in December after VLW withdrew its FY19E earnings guidance. That forecast withdrawal was exacerbated by the fact VLW had maintained the 2019 forward guidance at its mid-November AGM.

Ho Bee Land Ltd (HOBEE SP), VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$1.95/share – and a high of A$2.18/share – lifting its stake to 9.41%. Its stake in VLW accounts for only 1.5% of its market cap. I would not be surprised if Ho Bee is still buying in the market.

VLW announced a 1H19 NPAT of A$17.6mn ($17.3mn) last month – slightly above its $16mn to $17mn guidance – and declared a A$0.08/share franked dividend. Assuming FY19E profit of $27mn, VLW is trading at a not unreasonable 10x PER and an attractive 7.3% yield, one of the highest yields among its peer group, assuming the high-end of the 50-75% payout ratio policy. 

4. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit

Late Monday evening, Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector. L&T is seeking to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN) through a three-step transaction. Mindtree’s founders/promoters together have a 13.3% stake and staunchly oppose the takeover. L&T’s open offer presents an opportunity for longstanding large shareholders to partially or fully exit their stakes at a reasonable price.

5. Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?

The quietly disputed Tender Offer MBO for Kosaido Co Ltd (7868 JP) continues on its merry way. 

Originally scheduled to close March 1st, near the end of February 2019, Bain Capital Japan’s acquisition vehicle (BCJ-34) extended the ¥610/share Tender Offer MBO deadline by 11 days from March 1st to March 11th. Of course, that was something of a moot point – by that time, the shares hadn’t traded at less than a 15% premium to terms for a week after well-known local activist Yoshiaki Murakami’s vehicle Reno KK and affiliates had taken a stake of just below 10%. 

On the 8th of March, BCJ-34 raised its Tender Offer Price by 14.8% to ¥700/share and extended the Tender Offer by almost two weeks to the 25th of March. It also lowered the amount which needs to be bought to 50.1% from 66.67%. In that amended filing the buyer included words 「公開買付者は、本開買付条件の変更後の本公開買付価格を最終的なものとし、今後、本公開買付価格を一切変更しないことの決定をしております。」which roughly translates to “The Offeror, having changed the terms, has made This Tender Offer Price final, and from this point onward, has decided to absolutely not raise the Tender Offer Price.”

That’s that, but since then, the shares have not traded as low as the newly raised Tender Offer Price.

With one week to go, Aoyama Fudosan yesterdat announced it had lifted its stake to 747,800 shares or 3.00% of shares out, which brings the combined Reno KK/Aoyama Fudosan stake to 11.71%. 

Given the 1.1mm shares traded since the 11th (i.e. shares which if Murakami-san had bought he would not have to report until the 19th (today)) and that the share price was up sharply in decent volume this afternoon, it would not be difficult to imagine a higher stake being reported in the days ahead.

Murakami-san is not going away. This is starting to look a bit like another Murakami situation of recent. And that one turned out well.